Hundreds of thousands of Britons with more than £3,500 in savings are set to receive letters from HM Revenue and Customs (HMRC) warning them of potential tax liabilities, as rising interest rates push more savers above tax-free thresholds.
An estimated 887,000 people will be contacted by HMRC in the coming weeks as part of a move to clamp down on untaxed savings interest. With rates on savings accounts now significantly higher than in recent years, many savers may be unknowingly exceeding their Personal Savings Allowance.
What’s Taxable?
While money held in savings accounts is not taxed directly, interest earned on those savings can be — and more savers are finding themselves caught out. The Personal Savings Allowance (PSA) was introduced in 2016 and has remained unchanged since.
- Basic-rate taxpayers can earn up to £1,000 in interest tax-free.
- Higher-rate taxpayers are limited to £500.
- Additional-rate taxpayers get no allowance and must pay tax on all interest earned (outside of ISAs or tax-free accounts).
As interest rates rise, savers with relatively modest balances — often as little as £3,500 — are beginning to breach these thresholds.
Why Now?
The warning comes as the UK continues to experience higher-than-usual interest rates, with many easy-access savings accounts now offering rates of 4–5% or more. In previous years, it would have taken large balances to earn £1,000 in interest, but today even average savers may be at risk of exceeding the PSA.
For example, a savings balance of £20,000 at 5% interest earns £1,000 in a year — reaching the PSA for a basic-rate taxpayer.
What You Need to Do
Those receiving HMRC letters will be expected to declare their interest earnings through a self-assessment tax return or via a digital form if not already registered. The letters are designed to raise awareness and prompt voluntary compliance before penalties are issued.
Financial experts are advising savers to:
- Check how much interest you’ve earned across all your accounts (this includes banks, building societies, and credit unions).
- Consider moving savings into tax-free options like Cash ISAs, which allow up to £20,000 in deposits per tax year.
- Seek professional advice if unsure about your tax status or allowance.
Growing Concerns
Industry analysts warn the situation may worsen unless the PSA thresholds are reviewed. Critics argue that frozen tax bands, combined with inflation and rising interest, are dragging average earners into tax liabilities that were once reserved for wealthier savers.
In response to the growing number of affected savers, HMRC has assured the public it will take a proportionate approach to enforcement, focusing on transparency and education before issuing penalties.
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